A HYPOTHESIS ON THE CONTENT OF THE SOVIET DEFENSE BUDGET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000602120001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 22, 2016
• Document Release Date: March 28, 2012
• Sequence Number: 1
• Publication Date: March 1, 1977
• Content Type: REPORT

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A Hypothesis on the Content
of the Soviet Defense Budget
ER 77-10129
March 1977
Copy No.
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A HYPOTHESIS ON THE CONTENT
OF THE SOVIET DEFENSE BUDGET
The Soviet government closely protects information on its defense spending,
releasing only one official statistic annually. Moreover, the Soviets have never clearly
defined what activities are included in this figure.
Several newly examined Soviet and East European unclassified financial books
suggest that the defense budget covers only the maintenance and operating costs
of the Soviet military establishment. Other costs, including the large expenditures
for major weapons systems, are presumably hidden in nondefense categories of the
state budget or financed from nonbudgetary sources. The published defense figure
is reasonably close to independently derived CIA estimates for operational costs,
although the trends in the two series differ.
The Soviet and CIA defense series are not, however, easily compared. Soviet
budget data are expressed in current rubles, which includes the effect of military
price increases. CIA estimates, on the other hand, are expressed in constant 1970
rubles, which removes the effect of price changes. When adjusted for inflation,
the Soviet defense budget is higher than the CIA estimate for operational
expenditures through 1970, and lower after 1970. Also, the CIA data indicate
that Soviet military operating costs have been increasing annually since 1960. The
Soviet figures show such costs rising prior to 1970 but falling thereafter. The
discrepancy may be due to definitional differences, CIA data problems, or may
result from the Soviet manipulation of the defense budget for political purposes.
In any case, it is unlikely that Soviet operating costs could be falling in the 1970s
in light of manpower and pay increases in the Soviet military as well as the increased
complexity of Soviet weapons.
We do not have sufficient information at this time to prove our hypothesis
that the defense budget is an operational budget. Nevertheless, consideration of
this issue improves our overall understanding of Soviet defense expenditures and
points out promising areas for future research.
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The USSR maintains extreme secrecy on its spending for defense and
constituent defense programs. Only one official figure on defense expenditures is
released annually-the single-line item labeled "Defense" in the Soviet state budget.
This number, however, is clearly too low to cover the full range of Soviet military
activities. In fact, actual defense outlays are believed to be about three times larger
than the Soviets publicly admit. For example, CIA has estimated that actual Soviet
1975 defense expenditures-defined to accord with US budgetary accounts--were
50-55 billion rubles in 1970 prices, while the announced defense number came
to 17.4 billion rubles in current prices. Under a broader definition-as the Soviets
might account for their defense effort-CIA estimates Moscow's defense spending
in 1975 to have been 55-60 billion rubles.
Soviet sources have never clearly defined what activities are included in the
published defense budget. It is known that defense expenditures funded by the
Ministry of Defense (MOD) are planned on the basis of the MOD estimate, or
Smeta. Soviet financial writers describe the activities covered by the Smeta as
including military pay and subsistence, outlays for operations and maintenance,
military procurement, and military construction.' It is significant, however, that
nowhere in the Soviet literature is the MOD "estimate" unequivocally linked to
the "Defense" line of the state budget. Nor does the literature contain any
quantification of the MOD "estimate."
The uncertainty surrounding the true coverage of the annually published data
series has rendered them virtually useless as a barometer of the level of or the
trend in total Soviet defense expenditures. As a result, Western analysts have had
to devise alternative techniques to estimate such outlays. Uncovering the real basis,
if any, for the Soviet announced defense budget would greatly assist in this effort.
New Insights
Several Soviet analyses of the financing of defense expenditures imply that
the announced defense budget covers only the operating and maintenance outlays
1. See for example, A. M. Aleksandrov, ed., Gosudarstvennyi byudzhet SSSR, 1965, pp. 382-383 and D.K.
Allakhverdyan, et. al., Finansy SSSR, Moscow, 1962, p. 310.
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of the Soviet military establishment.' These probably include pay and allowances
of military personnel, wages of civilian MOD employees, some current repair, food
and nonfood quartermaster supplies, utilities, and the like. Expenditures for the
procurement of weapons, construction of facilities, military space programs, R&D,
and other defense activities presumably are hidden elsewhere in the state budget
or financed from nonbudgetary sources.
In an analysis of state expenditures through 195 1, V. P. D'yachenko contrasted
the maintenance expenditures of the military with other outlays, such as those
for construction of facilities and for materiel supply. He states, for example, "in
the nonproductive sphere are carried out expenditures on defense and the ensuring
of state security (the construction, maintenance and supplying of the Red Army,
the Navy, the frontier guards, and the maintenance of the organs of Soviet
intelligence)."3 The author provides a table on the 1949 state budget where
soderzhaniye vooruzhenikh sii, , the maintenance or upkeep of the armed forces,
is substituted for the standard budget nomenclature for defense, oborona.4 The
figure he gives for the "maintenance" of the armed forces is identical to the
announced defense budget for that year.
D'yachenko does not explain his deviation from conventional Soviet
phraseology on the defense budget. He may have intentionally used the concept
of "maintenance" to distinguish operational from investment-type outlays. If so,
then he is suggesting that the defense budget is an operating budget. This budget
would understate total defense spending by the amount expended for military
construction, procurement, and other nonoperational costs. On the other hand,
D'yachenko could have loosely used the term "maintenance" to mean overall
provisions for the military, as in "maintaining the military establishment." This
concept would include both operating and investment-type expenses. In any event,
the fact remains that D'yachenko's budget nomenclature is unprecedented, and
for that reason its implications warrant further testing and evaluation.
2. V.P. D'yachenko, Tovarno-denezhniye otnosheniya i finansy pri sotsialisma, Moscow, 1974, pp. 322-323,
326, 382. D'yachenko, a corresponding member of the Academy of Sciences, was head of the Department
of Pricing at the Academy's Institute of Economics from 1953 until his death in 1971. The 1974 book
is a collection of his writings, and was edited by the most prestigious names in Soviet finance, including
A. M. Aleksandrov, D. K. Allakhverdyan, and M. S. Atlas.
L. Ya. Berri, ed., Planirovaniye narodnogo khozyaistvo SSSR, Moscow, 1973, pp. 451-453.
Support for this interpretation of defense budgets is also provided by an East European writer, Milan
Spicak, in V armade po unoru, Prague, 1968, pp. 153-156.
3. D'yachenko, op. cit., p. 326.
4. /bid, p. 382.
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The hypothesis that defense budgets in the early postwar years represented
operating expenditures seems to be supported by Czechoslovakia,
whose financial system is patterned on the Soviet model. To a large extent
Czechoslovakia's methods for financing (and concealing) defense outlays may reflect
the prevailing Soviet practices. weapons
procurement and military construction in 1948-49 were financed from investment
credits "camouflaged" in the nondefense portions of the state budget.5 If true,
the announced defense budget was limited to operating and maintenance activities
of the armed forces. The data imply that total
Czechoslovak defense expenditures for 1949 were funded 61 percent from the
announced defense budget and 39 percent from other budget lines.
Support for the hypothesis that the defense budget expenditures are limited
to operations and maintenance costs also is found in a 1973 treatise on
economic-financial planning by Soviet input-output specialist L. Ya. Berri. He
presents a concept of state expenditures in which defense, raskhodi na oboronu,
explicitly excludes all capital investment and capital repair. Other defense-related
activities not included in this definition of defense were increases in state material
reserves and social-cultural measures (such as science).6 While Berri does not define
the "expenditures on defense," the clear inference is that they are limited to
operational-type outlays. Although Berri's analysis includes nonbudget expenditures,
he demonstrates that Soviet planners employ a concept of defense which excludes
many of the costly investment-type activities associated with the total defense
program. Moreover, this concept is given the same label used in the state budget.
Testing the Hypothesis
CIA independently estimates Soviet defense outlays using a building block
approach, which applies prices to the physical components and activities which
would be considered as defense related in the US. The resulting ruble expenditures
can be aggregated by principal resource category-investment, operating, and R&D.
There are some inherent uncertainties in the CIA estimates due to the lack of
precise knowledge of some Soviet defense activities as well as possible variations
in coverage resulting from differences in US and Soviet definitions.
CIA's estimates of Soviet operating expenditures can be compared with the
defense budget announced by the Soviet Union to test the hypothesis that the
5. Spicak, op. cit., p. 154.
6. Berri, op cit., p. 542.
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announced budget covers only the operating and maintenance expenditures of the
military establishment. This comparison is shown below:
Published Defense Budget
(Billion Current Rubles)
CIA Operating Cost Estimates'
(Billion 1970 Rubles)
1960
9.3
9-10
1965
12.8
12-13
1970
17.9
15-16
1975
17.4
17-18
1976
17.4
18-19
1. Includes those activities which would be considered as operating expenditures
in the US; pay, food, clothing and personal equipment expenditures for military
personnel, MOD civilian wages, facility and equipment maintenance costs, POL,
utility and transportation costs, and miscellaneous other maintenance costs.
At first blush the expenditure levels of the two series appear to be in the
same general range. In fact, the figures are virtually equal in all years except 1970
and 1976. The trends in the two series however, are markedly different.
The two sets of data, nonetheless are not directly comparable because of the
effects of inflation. Most Western analysts agree that there has been inflation in
the Soviet Union. The pace of that inflation is difficult to measure because of
the nature of the Soviet economy as well as the paucity of Soviet price data.
Western studies generally place the rate of price increases in the Soviet Union in
the range of 2 to 5 percent annually.' Several Soviet economists have privately
admitted to a 3- to 4-percent annual increase in prices.
The defense budget published by the Soviet government is expressed in current
rubles, which includes the effect of price changes. The CIA estimates, on the other
hand, are expressed in constant 1970 rubles, which removes the effects of price
change. A strict comparison of the published data and the CIA estimates of
operating expenditures requires that the Soviet numbers be adjusted for price
changes.
We attempted to estimate the rate of inflation in Soviet defense expenditures
by applying statistics on Soviet prices-official Soviet wholesale price indexes and
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wage data, supplemented with Western data on Soviet prices-to the relevant
categories of the CIA estimate of Soviet military operating expenditures. An average
annual rate of inflation of more than 1.5 percent between 1960 and 1976 was
indicated by that exercise.8 Assuming an increase in Soviet prices of 2 percent
annually, the following comparison results:
Billion
Soviet Defense Budget
Published
(Current Rubles)
Adjusted'
(1970 Rubles)
CIA Estimates
(1970 Rubles)
1960
9.3
11.3
9-10
1965
12.8
14.1
12-13
1970
17.9
17.9
15-16
1975
17.4
15.8
17-18
1976
17.4
15.5
18-19
With the adjustment for inflation, the Soviet published budget is higher than
the CIA estimate through 1970 and lower than the CIA estimate after 1970. The
CIA figure is 2-3 billion rubles lower than the published number in 1970, the
only directly comparable year. Also, the CIA data indicate that Soviet military
operating costs have been increasing annually since 1960. The Soviet figures, on
the other hand, show such costs rising prior to 1970 but falling thereafter.
Admittedly, there is some uncertainty built into the CIA estimates-they should
be regarded as general orders of magnitude rather than point estimates.
8. Two serious problems raise questions as to the reliability of this test. First, Western analysts generally
question the meaningfulness of Soviet price indexes (see, for example, Vladimir Treml and John Hardt (eds)
Soviet Economic Statistics, Durham, N.C., 1972, p. 103-106.) Second, insufficient information exists to judge
whether wholesale price indexes approximate price changes faced by the military. With these uncertainties,
our notional judgment is that an arbitrarily assumed rate of inflation of 2 percent is roughly appropriate.
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It is unlikely, for example, that Soviet operating
costs could be falling in the 1970s as suggested in the Soviet data. Soviet military
manpower levels have increased over this period by about 370,000 men, there have
been several military pay increases, and operations and maintenance costs have
undoubtedly risen due to the increased complexity of Soviet weapons.
On balance, the hypothesis that the USSR's announced defense budget is an
operating budget cannot be confirmed on the basis of information currently
available to Western observers; neither the magnitudes nor the trends in the Soviet
data mesh with CIA estimates of Soviet operating costs. Nevertheless, we cannot
rule out a real basis for the Soviet data. Rather, several plausible alternative
interpretations of the hypothesis can be made. For example, it is possible that
the defense budget may consist solely of operating expenditures, but it may not
include all such expenditures because of Soviet accounting practices. Alternatively,
the Soviet definition of operating expenditures may change over time. It is also
possible that, definitional differences aside, the budget may be manipulated for
political purposes. For example, some operating expenditures may have been added
to the defense budget in the second half of the 1960s to counter the rapid expansion
in US defense budgets. Similarly, some operating expenditures may have been
shifted from the defense budget to other budget lines in the 1970s to signal Soviet
attitudes about detente.
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